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Knorr Cetina, Karin

Article
Economic sociology and the sociology of finance:
Four distinctions, two developments, one field?

economic sociology_the european electronic newsletter

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Suggested Citation: Knorr Cetina, Karin (2007) : Economic sociology and the sociology of
finance: Four distinctions, two developments, one field?, economic sociology_the european
electronic newsletter, ISSN 1871-3351, Max Planck Institute for the Study of Societies (MPIfG),
Cologne, Vol. 8, Iss. 3, pp. 4-10

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Economic Sociology and the Sociology of Finance
Economic Sociology and the Sociology of Finance.
Four Distinctions, Two Developments, One Field?
Karin Knorr Cetina
University of Chicago and University of Konstanz
knorr@uchicago.edu , karin.knorr@uni-konstanz.de
Are there significant distinctions between economic sociol-
ogy and the sociology of finance?1 Are such differences
anchored in existence, do they have something to do, that
is, with how the economy and finance function and are
articulated in the contemporary world? In this paper I con-
tend that we do indeed witness the branching off of two
distinctive fields which, surprisingly perhaps, do not have a
common history or origin. In other words, the study of
finance and financial markets as we see it happen now is
not simply an outgrowth of the new economic sociology
that emerged since the 1980s. Nor has economic sociology
in general with its long history and several ups and downs
developed in a way that makes the turn to finance the
logical next step for it to take. Two systems that co-exist
may have overlaps and become coupled. Some researchers
have, during their lifetime, contributed to both areas. Max
Weber wrote an early, recently republished, astute essay
on the stock exchange, though most of his work tackles
larger and more general issues summarized in Economy
and Society (2000 [1894]). Baker applied network concepts
to securities markets at the onset of the new economic
sociology (1981, 1984), and Zelizer’s recent work on cir-
cuits of commerce (2005) is an attempt to develop a unify-
ing concept that potentially serves both areas. Yet most
scholars that have long made distinguished contributions
to economic sociology remain concerned with the founda-
tional issues of their field – the phenomena of embedded-
ness, of networks and interfirm relationships, of producer
markets, and of the role of culture in economies and cor-
porations. And most studies of finance do not pursue these
lines of reasoning but rather develop fresh concepts and
ideas that draw on outside areas in their theoretical analy-
ses.
What are some of the core differences between economic
sociology and the sociology of finance and how are they
motivated? In the following, I offer four arguments de-
signed to capture and account for some of the distinctions
between these areas.
economic sociology_the european electronic newsletter
4
First difference: Unlike the recent sociology of finance,
economic sociology has focused on producer markets and
the production side of the economy. Let me begin with a
bit of history. According to a wealth of statistics, finance
has risen in importance in the last quarter century more
rapidly than any other sector of the economy. Since it
bottomed out in 1982, the US stock market experienced its
most dramatic increases in prices in history when long term
data from 1871 to 2000 are considered, and large stock
price increases also occurred in Europe, Asia and Australia.
In the period between 1981 and 1986 alone the volume of
US public bond issues rose at an annual rate of 37%, equity
issues almost tripled, the dollar volume of mergers and ac-
quisitions activity tripled, and the volume of international
bonds multiplied fivefold (Eccles and Crane 1988: 1). There
were since then several readjustments of the spiking of
prices and activities (examples are the ‘Black Monday’ of
October 19, 1987 when the Dow Jones Industrial Average
dropped 508 points, and the market decline in 2001 and
2002). Nonetheless, the level and diversity of financial
activities appears to have increased significantly since the
1980s. More importantly, perhaps, awareness of the finan-
cial system, of the risks and benefits it offers to individuals
and organizations, has also risen. As Sassen shows (e.g.
2005), the stock of financial assets has increased three
times faster than the aggregate GDP of the 23 highly de-
veloped OECD countries since 1980, and the volume of
trading in currencies, stocks and bonds has increased five
times faster. Most of this activity is financial market activity.
For example, the global foreign direct investment stock
was US$ 6 trillion in 2000, while the worldwide value of
internationally traded derivatives was over $US 80 trillion
and rose to US$ 192 trillion in 2002. The largest financial
market in terms of volume of transactions, foreign ex-
change transactions, were ten times as large as world
trade in 1983 (the economic exchange of goods and ser-
vices), but 70 times larger in 1999, even though world
trade also grew sharply during this period (Sassen 2005).
Financial markets, then, have experienced an unprece-
dented rise since the early 1980s, and their power to de-
termine outcomes in production, consumption and social
welfare is now enormous.2 Yet they have not found much
attention in sociology. This is surprising in light of the
Volume 8, Number 3 (July 2007)
Economic Sociology and the Sociology of Finance
sharp upturn economic sociology has taken during the
same period and the pioneering work that has happened
since (e.g. Granovetter 1985; Zelizer 1985; Burt 1983;
Fligstein 2001; Podolny 2001; Dobbin 1994; White 2002).
Why the relative inattention? One answer surely is that the
new economic sociology has defined its territory in a way
that seems more attuned to the production side of the
economy than to finance. Economists have circumscribed
economic activities as that set of pursuits which involves
the use of scarce resources to satisfy some human needs or
wants – and they have broadly classified these activities
into the categories of production, consumption and ex-
change (Dholakia and Oza 1996: 7). Economic sociology
also defined economic behavior in these terms – in terms
of the institutions and relations of production, consump-
tion and social distribution (e.g. DiMaggio 1994: 28; Smel-
ser and Swedberg 1994: 3; Portes 1995: 3). In their re-
search, economic sociologists have focused on the produc-
tion side of the economy, taking the firm as their point of
departure – in line with the distinctive role production has
played in the discipline’s understanding of capitalism and
with the focus early economic sociologists placed on the
internal working of organizations (Swedberg 1991; Car-
ruthers and Uzzi 2000: 486). Though a number of early
studies were concerned with financial markets (Smith
1981; Baker 1984; Adler and Adler 1984), most recent
research has not been in this area but has involved a shift
from what goes on within firms to what goes on between
them. The dominant line of research specializes in the
analysis of interorganizational ties, in effect joining organ-
izational analysis and market analysis through the use of
network approaches that inspiringly analyze the nature of
the relationships and networks and how these affect labor,
product and credit-seeking (e.g. Baker 1990; Burt 1993;
Bandelj 2002; Baker et al. 1998; DiMaggio and Louch
1998; Uzzi 1999; Uzzi and Lancaster 2004). When markets
are analyzed they tend to be producer markets, e.g. mar-
kets for industrial products and non-financial services.
Interestingly, economic sociology in Europe until recently
also set aside financial markets, focusing instead on macro-
issues of the economy. Current research appears particu-
larly concerned with the transformation of the welfare
state and its social consequences, changing economic
policies, varieties of capitalism and the like (e.g. Hall and
Soskice 2001; Deutschmann 2002; Streeck and Yamamura
2003; Beckert 2006).3 Both the new economic sociology
that thrived in the US and European economic sociology
with its more industrial, macro-economic and political
concerns also neglected consumption, an area that devel-
oped into a special subfield of sociology within the ASA.4
economic sociology_the european electronic newsletter
5
The new economic sociology in the US also emerged from
a new engagement of neoclassical economics that moved
away from the “truce” between economics and sociology
Parsons is said to have negotiated earlier (see Swedberg
2003: 33), a truce that gave economics the core economic
matters and sociology the contextual and peripheral
things. Granovetter, we all know, attacked neoclassical
economics for wrongly assuming “atomized” decision
making by individual economic actors. He proposed the
opposite – decision making was embedded in networks of
social relationships that should be studied to correct neo-
classical and related models. This proposal did indeed open
up the “virgin lake” and “goldmine” of solvable research
questions that Granovetter foresaw (cited in Swedberg
2003: 35). But the focus on embeddedness, in its narrow
as well as in its broader definition (as cultural, political and
social embeddedness [Barber 1995]), left the core financial
activities untouched. More precisely, research in economic
sociology glossed over distinctions between different kinds
of economic action and particularly between producer
markets and financial markets in an effort to address the
question how activities are embedded in social structure.
Research has treated financial markets as implicated in
firm’s behavior and as outcomes of firm-bank relations,
but the focus of the analysis remained the firm or the in-
dustry rather than the stock exchange and trading floor
(see Keister [2002] for a summary of this literature). While
this research does not reject differences between markets,
it is also not designed to capture the types and patterns of
social structural and cultural variation that a “multiple mar-
ket”– model postulated early in economic sociology (Zelizer
1988; see also Mirowski 2002: 539) suggests. Yet some of
these differences, for example that between producer mar-
kets and financial markets, are consequential for almost
every level of analysis of markets.
Second difference: Finance and production are two distinc-
tive areas of activities and need to be differentiated in
research. Financial markets are not primarily concerned
with the production of goods or with their distribution to
clients, but with the trading of financial instruments not
designed for consumption. No “production” effort on the
traders’ part is involved in “spot” transactions, the direct
sale or buying of a financial instrument. When more com-
plex instruments are traded (options, futures, etc.), their
value tends to be calculated on the spot by traders them-
selves without recourse to production facilities. Financial
markets belong to a second order economy in which
“goods” are contracts that circulate rather than become
channeled to end consumers. These goods (financial in-
Volume 8, Number 3 (July 2007)
Economic Sociology and the Sociology of Finance
struments) are abstract entities which may not even be
pieces of paper but merely an entry in the books of rele-
vant parties; the value of these entities is determined by
financial market activities and is only tenuously related to
the underlying referent (e.g. a company). The shift from
concrete funds to abstract entities epitomizes the decoup-
ling of financial markets from the ordinary economy of
production, consumption and exchange.
The second aspect of this decoupling has to do with the
forms of action prevalent in financial markets, which are
investment and “speculation.” Consider the example of
the foreign exchange market where “actuals” (currencies)
rather than contracts are traded in spot transactions. His-
torically, currency dealers provided services for importers,
exporters, and others who needed foreign exchange to pay
bills and pay for goods. They were intermediaries in con-
ventional trading oriented to the transfer of goods from
producers to consumers. But only a tiny percentage of the
current daily trading volume in foreign exchange (about
1.2 trillion US dollars in 2001; BIS 2002) reflects “real”
requirements of companies; the daily volume of dollar
transactions in this market is approximately 200 times
larger than the added volume of US merchandise imports
and exports, plus other sales that require foreign exchange
(e.g. Caves et al. 1999: 420). Thus, most foreign exchange
dealing today is speculation not motivated by needs for the
product obtained but by the motive to gain from expected
price changes of the currency when it is resold. Speculation
and the seemingly endless circulation of the entities traded
also differentiate other financial markets not only from
producer markets but also from merchandise and service
trading, which is oriented toward the transportation of
goods from one location to another and toward consump-
tion at the end of the trading chain. Theoretically speaking,
financial markets appear to be internally differentiated,
complex self-referential systems whose functioning, forms
of action, and other mechanisms pose questions in their
own right – quite apart from the aggregate consequences
these markets have on economies and corporations. There
is, in Granovetter’s language, another virgin lake before us
(not fully untouched, of course - see the early studies of
these markets cited above) that warrants fishing expedi-
tions by social scientists. It is this discovery project that I
think the sociology of finance and financial markets has
embarked on.
There is a third reason for the decoupling of financial mar-
kets and producer markets: their separate historical devel-
opment. According to some historians, the emergence of
economic sociology_the european electronic newsletter
6
financial markets was not simply part of industrialization
but preceded and then enhanced production-based capi-
talist developments (e.g. Rousseau and Sylla 1999). More
recently, financial markets became de-synchronized from
the global system of production through successive waves
of liberalization of capital flows and financial services from
the control of individual nation states (see the overview in
Swary and Topf 1992). For example, the removal of barri-
ers between national financial markets, particularly cur-
rency markets in the last decades of the 20th century,
enabled the emergence of a system in which economists
consider frictions and impediments to be minor and which
appears in fact beyond the control of any regulatory struc-
ture. Production systems remain more deeply embedded in
national regulatory environments that affect many aspects
of the workforce they require, e.g. the plants, the equip-
ment, the ecological aspects of production, among others.
The historical uncoupling manifests itself in the transforma-
tion effects of financial capitalism on industrial capitalism
and the political system. As we know, capital markets have
become major funding alternatives to banks as a source of
debt financing for industrial corporations, with conse-
quences for employees’ compensation, now frequently
including stock options, which shifts the power from man-
agers to shareholders (e.g. Fligstein 2001: ch. 7; Zorn et al.
2005), and changes in the structure of accounting, among
others. In the US and UK, less than 30% of corporate fi-
nance came from commercial banks before the turn of the
century (Chernow 1997). The system has also shown a
considerable tendency for internal expansion, evolution
and intensification – of instruments, trading strategies,
professional roles, and so on. Financial markets have been
a laboratory and breeding ground not only for the creation
and proliferation of financial instruments but also for the
“intensification of finance” (Bryan and Farrell 1996) that
manifests itself in the dramatic rises in trading volume and
cross-border investment. The uncoupling can also be
gleaned from the role currency markets play as an inde-
pendent power in testing and determining the value of
currencies against the authority of central banks and gov-
ernments. This illustrates the more general role of some
financial markets as external observers and evaluators of
national macroeconomic policies that are signaled in eco-
nomic indicators and exchange rates.
Third difference: In contrast to economic sociology, the
sociology of finance needs new concepts to understand
finance and financial markets as complex systems in their
own right. The sociology of finance and financial markets
took off since the late 1990s, with publications increasingly
Volume 8, Number 3 (July 2007)
Economic Sociology and the Sociology of Finance
appearing in English, French and German since the turn of
the century (see among others Mars 1998; Callon 1998;
Preda 2001, 2006; Miller 2002; Knorr Cetina and Bruegger
2002); Muniesa 2003; MacKenzie and Millo, 2003; Zaloom
2003, 2006; Knorr Cetina 2003; Kalthoff 2004; Godechot
2005; Hassoun 2005; Beunza and Stark 2005; Windolf
2005; McKenzie 2006; Staeheli 2007). Institutional efforts
centered on the field (e.g. specialized conferences, journals
and research groups studying financial markets) also ap-
peared since that time. However, unlike the new economic
sociology for which Granovetter provided a road map and
supplied a theoretical framework (and pointed out a
methodology – network analysis), the recent sociology of
finance starts not from a paradigm but from a set of open
questions. How can we define an activity like speculation?
How did this activity become historically differentiated
from gambling with which it was once identified? What is
the architecture of financial markets? Is there a level of
sociality in markets that are assumed to be models of eco-
nomic efficiency and the outcome of anonymous activities
by atomistic actors? And how do we deal with some of the
most distinctive features of these markets, their knowledge
and information base, their complex technological under-
pinning and their global character? Financial markets do
lend themselves to extensions of embeddedness analyses,
as Baker’s (1984) early network analyses show, but they
also pose more general questions that appear urgent in
light of these markets’ functioning as driving factors and
iconic elements of a postindustrial and global world. More-
over, network forms of coordination were at times deliber-
ately bred out of financial markets with the help of technol-
ogy (Knorr Cetina 2003) – yet this does not mean that
these markets are not in other ways social and cultural
forms. While it will be necessary to learn from the em-
beddedness-paradigm and to apply it where appropriate, it
is also necessary to draw on the larger toolbox of socio-
logical concepts and theories when we study these mar-
kets.
As an example, consider the global character of financial
markets. One can argue that the distinct historical devel-
opment of financial markets, their separation from pro-
ducer markets as well as their early deregulation has put
these markets on a track towards globalization – some
financial markets (e.g. currency markets) have in fact long
been transnational. In other words, the financial system
can arguably be considered a structure of the world rather
than of national societies. Economies, on the other hand,
have typically been localized; they are the economies of
nation states. They depend on national regulatory frame-
economic sociology_the european electronic newsletter
7
works and institutions, tax and social security systems,
national policies and interventions. They use national cur-
rencies and presuppose the existence of a national central
bank. Their localized character is reflected in national eco-
nomic indicators and in the attention given to them. Finan-
cial markets, in contrast, appear delocalized and disem-
bedded (in Giddens’ sense). Social geographers have long
noticed this transnational character – they were among the
first to observe the concentration of financial markets in
global centers that are interconnected across time zones
and continents (Sassen 2001; Leyshon and Thrift 1997).
Not all financial markets, one should add, are equally
global. While currency markets are inherently transnational
markets, bond and equity markets are not, though they
have become increasingly global in the most recent global-
ization wave. As Sassen (2005) shows, the value of cross-
border transactions in bonds and equities as a percentage
of GDP in the leading economies was 4% in 1975 in the
U.S., 35% in 1985 when the financial era was in full
swing, and rose to 230% in 1998. This share grew from
5% to 334% in Germany, and from 5% to 415% in
France. Similar arguments can be made for exchanges
which used to be national institutions but are in the proc-
ess of forming global alliances. The global character of
these markets poses the question whether there can be a
level of integration of markets that are distributed in space,
what mechanisms beyond economic transactions link to-
gether these markets, how we can understand the trans-
national systems of communication in terms of which par-
ticipants interact (as purely economic speech acts?), and so
on. In fact, most questions related to the phenomenon of
globalization and a world society can be posed in this con-
text. The study of global financial markets also offers an-
swers to more general globalization-related questions – as
a specialized, bounded domain, it can be researched in
depth in real time – we do not have to contend with the
difficulties of multicultural aggregate statistics, question-
able categories, etc. that globalization research struggles
with. In addition, the financial system is a sociologically
and culturally innovative expert system that experiments
with creating and managing global forms. Accordingly, the
answers we get from this research can tell us something
about the structural components of an emerging global
society.
Fourth difference: The financial system is a knowledge
system, and the sociology of finance and financial markets
must include questions of knowledge and technology in its
research. There are many ways in which knowledge and
information are an intrinsic part of financial systems.
Volume 8, Number 3 (July 2007)
Economic Sociology and the Sociology of Finance
Economists, one should note, long assumed such a link; it
emerges from the economists’ view that knowledge is
contained in and extractable from asset prices or that the
latent function of capital markets is to provide information
for decision making. It also emerges from the analysts’
usage, in studies of foreign exchange trading patterns, of
the number of transactions as a proxy for the information
arrival process (for detailed references to this literature see
Knorr Cetina and Bruegger 2002). To conceptualize the
importance of knowledge in this area we can build on
these ideas. The information contained in prices, for exam-
ple, not only helps dealers make decisions, it stimulates
deals. In other words, the information arriving with price
changes continually excites the system into further trading.
Thus the speculative “exuberance” (Shiller 2000: 3) and
the volatility that is a characteristic feature of financial
markets (as opposed to producer markets or consumption-
oriented trading) appear intrinsically connected to the fast
flow of information. Second, content-wise, the vast major-
ity of market exchanges that are not pure dealing se-
quences involve knowledge and information. “What we
are really dealing in,” traders say, “is knowledge and in-
formation.” Knowledge is also the means of relationship
building in global fields. Participants exchange information
to build and maintain business links. This “commerce of
knowledge and information” is based upon principles of
reciprocity and gift exchange (information offered as a gift
establishes and manages relationships); and the circuits of
information partly overlap with trading transactions. Last,
the knowledge flows map the world in which traders
move; these flows constitute the special lifeworld of a
global social form that has disembedded, left behind its
natural embeddedness in local and physical settings. I ar-
gue that market reality itself is knowledge-generated,
having no existence outside the informational presentation
of the market on the screen that is provided by news
agencies, analysts, and traders themselves. The point is
that the wider nexus of economic, social, and “lifeworld”
functions of knowledge in this area must be included in
investigations of finance. Questions of information are of
course present also in the production economy, as Marx
pointed out when he referred to the role of technology
and machines as potentially alienating factors in industrial
settings. But they are neither background variables (crystal-
lized in equipment) nor source of alienation in financial
settings. Information is scarce, intensely communicated,
and highly valued. Most importantly, it is present in every
aspect of finance and in the core activities of financial
transactions.
economic sociology_the european electronic newsletter
8
Conclusion: It is tempting to argue that it is the intrinsic
relevance of knowledge and information to financial activi-
ties that motivated scholars from science studies to take a
special interest in finance. They surely brought with them
an awareness of the potential characteristics and special
questions posed by sophisticated technological and knowl-
edge structures of this field. Did the intrinsic challenges of
the financial system stimulate an interest from areas that
were not part of economic sociology (social geographers,
science studies) but found the challenges familiar? The
answer, I think, is not so clear. Finance and financial mar-
kets have been a discovery project for everyone that looks
at these areas. Financial information is in many ways quite
unlike natural scientific knowledge; financial technologies
do not correspond to the inscription devices and appara-
tuses that technosciences use; global systems of transac-
tion are not the everyday fare of laboratory studies, and so
on. I, for one, did not step on a trading floor in search of
characteristics I had encountered elsewhere – I moved into
this field believing that financial capitalism was the direc-
tion in which postindustrial societies were developing, and
it interested me what that meant. It is rather, I suppose,
the tendency to behave unsociologically – in the sense of
including in one’s research the core of an “alien” practice
– whether it is the epistemic core of science or the specula-
tive core of finance – that characterizes these recent ef-
forts.
Where will it all end? My prediction, for now, is that we
will see two specialized fields: one concerned with larger
questions of the economy and society and precise concep-
tual tools to define and transcribe economic action as
social action, and the other concerned with a multifaceted,
impure and voracious domain that until now often defies
dissection by precision tools – that of financial markets.
Karin Knorr Cetina teaches at the University of Constance
and the University of Chicago, and is a member of the
Institute for World Society Studies, University of Bielefeld,
Germany. She is a former president of the International
Society for Social Studies of Science, a former member of
the Institute for Advanced Study, Princeton, and a future
member of the Center for Advanced Study in the Behav-
ioral Sciences in Palo Alto, CA. She has published many
articles in international journals on knowledge, science and
financial markets and is the author of several books, in-
cluding Epistemic Cultures: How the Sciences Make
Knowledge (Harvard University Press, 1999), which re-
ceived two prizes. She is currently working on a book on
the Global Microstructures of Financial Markets.
Volume 8, Number 3 (July 2007)
Economic Sociology and the Sociology of Finance
Endnotes
1 It is also sometimes called social studies of finance to empha-
size, as I see it, the analytical relevance of fields outside sociology
to the topics studied.
2 To be sure, ours is not the first period in history that shows a
heightened curiosity in financial markets. For some of these his-
torical developments from a sociological perspective, see Preda
(2001), Mirowski (2002), Staeheli (2007).
3 One assumes that this orientation will continue, given the
changes now confronting the continent and the political prob-
lems, social consequences and issues of mentality that they in-
voke.
4 Which is not to say that no one in economic sociology ever
addressed consumption issues. But those who do often have
broader interests, for example in cultural sociology (e.g. Wuthnow
1996).
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